SVB: collapse forces rate review and hits bank action – 03/13/2023 – Market

The Silicon Valley Bank bankruptcy has hit global markets, with investors revising their forecasts for further interest rate hikes and liquidating bank stocks around the world.

US government bond prices soared on Monday (13), posting some of the biggest increases since the 2008 crisis, as fund managers increased bets that the Fed (Federal Reserve, US central bank) will leave interest rates unchanged at its next monetary policy meeting, scheduled for this month, to stabilize the global financial system. Just last week, the markets were preparing for another 0.5 percentage point increase.

Meanwhile, bank shares fell sharply. Europe’s Stoxx banking index fell 5.7%, taking its decline since the middle of last week to just over 11%, with all 22 stocks in the index in negative territory. Several lenders suffered double-digit declines in the second alone, including Austria’s Bawag Group and Germany’s Commerzbank. Spain’s Banco Sabadell fell more than 9%.

Futures tracking Wall Street’s S&P 500 and technology Nasdaq 100 were up 0.2% and 0.6% ahead of the New York open after U.S. regulators said on Sunday that SVB depositors would be fully refunded and revealed emergency funding measures in an attempt to contain the fallout. In the UK, the Bank of England negotiated an agreement to sell the British arm of SVB to HSBC for one pound sterling.

But major US bank futures fell about 2% and investors were picking weaker names. Shares in First Republic, another San Francisco-based bank, fell as much as 68% in premarket trading after it announced on Sunday it would receive $70 billion in funding from JPMorgan and the new Fed support.

The bankruptcy of SVB and the closure of Signature Bank came just months after the rapid UK government bond crisis, highlighting the hidden risks in the financial system that are emerging as central banks remove the largesse that has protected markets after the emergence of the Covid-19 pandemic. Investors and analysts said policymakers at the Fed and elsewhere would need to be cautious as they try to contain inflation.

“The SVB situation is a reminder that the Fed’s hikes are having an effect, even as the economy has resisted thus far,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a note to clients. “Worries about bank earnings and balance sheets also contribute to negative sentiment towards […] equity markets.”

Futures markets show that investors believe the US central bank will moderate interest rate hikes from now on, despite Fed Chairman Jay Powell’s reminder a week ago of his determination to curb inflation and despite data from Friday (10) showing that the US economy created 311,000 jobs, against the 225,000 predicted by economists.

Refinitiv data shows that traders see a 15% probability that the US central bank will leave rates unchanged later this month. Expectations of a 0.5 point hike have evaporated, leaving about an 85% probability that the Fed will choose to raise interest rates by 25 percentage points to a target of between 4.75% and 5%.

Goldman Sachs said Monday that it does not expect any further hikes at the Fed meeting ending March 22, “in light of the recent stress on the banking system.”

Investors have also trimmed their bets on how much the European Central Bank will raise its deposit rate later this year, to just above 3.5%, down from a peak of 4.2% last week.

The shake-up in the bond markets was substantial. The yield on Germany’s interest rate-sensitive two-year bonds plunged 0.48 percentage points to 2.62% on Monday, as bond markets rose sharply in response to fading expectations of further hikes in interest rates. borrowing costs. The rate has fallen from the 14-year high of 3.3% it hit last week, showing how investors have reassessed their rate expectations since the SVB collapse.

In the US, the benchmark ten-year government bond yield fell 0.16 percentage point to 3.54%. The two-year Treasury yield fell 25 percentage points to 4.33%.

George Saravelos, a strategist at Deutsche Bank, said the Fed’s SVB bailout package, which includes an offer to absorb government debt and mortgage-backed securities at above-market prices, represents a new form of quantitative easing – the program bond purchases that US policymakers turned to after the pandemic to stabilize the financial system.

“Both the speed and the endpoint of the Fed’s walking cycle should slow down,” Saravelos said. “We’ve learned two things over the last few days. First, this monetary policy tightening cycle is running on a lag, like all the others. Second, this tightening cycle will now be amplified due to the stress on the US banking system.”

Michael Every, an analyst at Rabobank, said the implications of “the Fed’s bailout of Silicon Valley venture capitalists who fund Instagram filters that make cats look like dogs” are potentially “enormous”.

“The Fed is indeed allowing massive easing of financial conditions as well as increased moral hazard,” he said in a note to clients.

Currencies that performed well in times of stress also rebounded. The Japanese yen and Swiss franc were both up about 1% against the dollar.

The rapid collapse of the SVB has made market participants “more aware again that the Fed will eventually break something if it keeps raising rates,” said Lee Hardman, currency analyst at MUFG.

The bank’s collapse also “deflated the sails on the US dollar”, highlighting the risks associated with raising rates, Hardman added. A measure of dollar strength against a basket of six international pairs was down 0.6% on Monday.

Collaborated Martin Arnold, in Frankfurt. Translated by Luiz Roberto M. Gonçalves